American Economic Review: Papers & Proceedings 100 (May 2010): 573-578 http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.573
In this paper, we exploit a new multi-country historical dataset on public (government) debt to search for a systemic relationship between high public debt levels, growth and inflation.1 Our main result is that whereas the link between growth and debt seems relatively weak at "nor- mal" debt levels, median growth rates for coun- tries with public debt over roughly 90 percent of GDP are about one percent lower than other- wise; average (mean) growth rates are several percent lower. Surprisingly, the relationship between public debt and growth is remarkably similar across emerging markets and advanced economies. This is not the case for inflation. We find no systematic relationship between high debt levels and inflation for advanced econo- mies as a group (albeit with individual country exceptions including the United States). By con- trast, in emerging market countries, high public debt levels coincide with higher inflation. Our topic would seem to be a timely one.
Public debt has been soaring in the wake of the recent global financial maelstrom, especially in the epicenter countries. This should not be sur- prising, given the experience of earlier severe financial crises.2 Outsized deficits and epic bank bailouts may be useful in fighting a downturn, but what is the long-run macroeconomic impact,
1 In this paper "public debt" refers to gross central government debt. "Domestic public debt" is government debt issued under domestic legal jurisdiction. Public debt does not include debts carrying a government guarantee. Total gross external debt includes the external debts of all branches of government as well as private debt that is issued by domestic private entities under a foreign jurisdiction.
2 Reinhart and Rogoff (2009a, b) demonstrate that the aftermath of a deep financial crisis typically involves a protracted period of macroeconomic adjustment, particu- larly in employment and housing prices. On average, public debt rose by more than 80 percent within three years after a crisis.
Growth in a Time of Debt
By Carmen M. Reinhart and Kenneth S. Rogoff*
especially against the backdrop of graying pop- ulations and rising social insurance costs? Are sharply elevated public debts ultimately a man- ageable policy challenge? Our approach here is decidedly empirical,
taking advantage of a broad new historical dataset on public debt (in particular, central government debt) first presented in Carmen M. Reinhart and Kenneth S. Rogoff (2008, 2009b). Prior to this dataset, it was exceedingly difficult to get more than two or three decades of pub- lic debt data even for many rich countries, and virtually impossible for most emerging markets. Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems,...